Supreme Court Upholds Water Tax on Premises: Jalkal Vibhag Nagar Nigam vs. Pradeshiya Industrial and Investment Corporation (2021)

Introduction

Date of the Judgment: 22 October 2021
Citation: (2021) Civil Appeal No 6107 of 2021
Judges: Dr Dhananjaya Y Chandrachud, J, Vikram Nath, J, BV Nagarathna, J
Can a local body impose a water tax on premises, even if the premises are not directly connected to the water supply? The Supreme Court of India recently addressed this question, examining the constitutional validity of such a levy. This case revolves around the challenge to the imposition of water and sewerage taxes by the Jal Sansthan under the Uttar Pradesh Water Supply and Sewerage Act, 1975. The core issue is whether these taxes are a valid levy on lands and buildings or an unconstitutional charge. The judgment was delivered by a three-judge bench comprising Dr. Dhananjaya Y Chandrachud, J, Vikram Nath, J, and BV Nagarathna, J, with the majority opinion authored by Dr. Dhananjaya Y Chandrachud, J.

Case Background

In 1986, the Pradeshiya Industrial and Investment Corporation (first respondent) began constructing a building in Lucknow, known as ‘PICUP Bhawan,’ which was completed in 1991 and handed over on 31 May 1991. On 5 January 1995, the Jalkal Vibhag Nagar Nigam (appellants) raised a demand of Rs. 46,63,312.50 as water tax for the period from October 1986 to March 1995. The first respondent sought clarification regarding the location of the water and sewer connections, and the relevant notification prescribing the ‘radius’ under Section 55(b)(i) of the UP Water Supply and Sewerage Act.

The bill was rectified on 28 January 1995, reducing the demand to Rs. 16,45,875.00 under Section 52(1) of the UP Water Supply and Sewerage Act. The respondent again requested clarifications, and after the appellant reiterated the demand, the first respondent deposited Rs. 3,46,500.00 on 15 March 1995 and a further sum of Rs. 9,41,942.77 on 29 April 1995, under protest. On 7 September 1995, the first respondent filed a writ petition challenging the water and sewerage taxes, arguing that they had not used water from the appellant’s pipeline during construction, nor had they requested a fresh water connection. The respondent also challenged the validity of Sections 52(a), 55(b)(i), and 56(b) of the UP Water Supply and Sewerage Act, claiming they violated Article 265 of the Constitution. The High Court allowed the writ petition and directed the appellants to refund the taxes. This decision was challenged in the Supreme Court.

Timeline

Course of Proceedings

The High Court of Judicature at Allahabad, Lucknow Bench, allowed the writ petition filed by the first respondent, directing the appellants to refund the water and sewerage taxes. The High Court relied on the Supreme Court’s decision in Union of India v. State of U.P. (2007) 11 SCC 324, without proper citation, and held that the law laid down in that case was applicable to the first respondent. The High Court did not discuss the merits of the case and simply directed the refund of the amount paid by the petitioner, if there was no legal impediment or outstanding dues. The review petition against this judgment was also dismissed. The appellants then appealed to the Supreme Court. The Supreme Court noted that the High Court’s judgment was drafted casually, with no discussion on the merits and no explanation as to why the cited judgment was applicable. The Supreme Court decided not to remand the proceedings, as the matter had been pending for over six years and had been fully argued on merits.

Legal Framework

The Uttar Pradesh Water Supply and Sewerage Act, 1975, aims to establish corporations, authorities, and organizations for the development and regulation of water supply and sewerage services. Key provisions include:

• Section 2(18): Defines “premises” as “any land or building.”
• Section 18(1): Allows the State Government to constitute a Jal Sansthan for improving water supply and sewerage services.
• Section 24: Specifies the functions of a Jal Sansthan, including planning, promoting, and executing water supply and sewerage schemes.
• Section 25: Enunciates the powers of a Jal Sansthan, including the power to collect taxes and charges for water supply and sewerage services.
• Section 33: Provides for the vesting of existing water supplies and sewerage services in the Jal Sansthan.
• Section 34: States that the Jal Sansthan will assume the obligations of the local authority in respect of the matters to which the UP Water Supply and Sewerage Act applies.
• Section 41: States that every Jal Sansthan shall have its own fund which shall be deemed to be a local fund to which shall be credited all monies received by or on behalf of the Jal Sansthan.
• Section 44: Allows the Jal Sansthan to fix and adjust its rates of taxes and charges to meet operational costs and achieve an economic return on its fixed assets.
• Section 52: Provides for the levy of water and sewerage taxes on premises within the Jal Sansthan’s area.
  • “52. Taxes leviable. – (l) For the purposes of this Act, a Jal Sansthan shall levy, on premises situated within its area: (a) where the area is covered by the water supply services of Jal Sansthan, a water tax; and (b) where the area is covered by the sewerage services of Jal Sansthan, a sewerage tax.”
• Section 53: Specifies the method for assessing the annual value of premises.
• Section 55: Enacts restrictions on the levy of taxes.
  • “55. Restriction on levy of taxes. – The levy of taxes mentioned in Section 52 shall be subject to the following restrictions, namely – (a) they shall not be levied on any land exclusively used for agricultural purposes unless water is supplied by the Jal Sansthan for such purposes to that land; (b) the water tax shall not be levied on any premises – (i) of which no part is situate within the radius prescribed from the nearest stand- post or other waterworks at which water is made available to the public by the Jal Sansthan; or (ii) the annual value of which does not exceed rupees three hundred and sixty, and to which no water is supplied by the Jal Sansthan.”
• Section 56: Specifies the liability for payment of taxes.
  • “56. Liability for payment of taxes. – The taxes mentioned in Section 52 shall be recoverable- (a) in the case of premises connected with water supply or, as the case may be, with the sewer of A Jal Sansthan, from the occupier of the premises; (b) in the case of premises not so connected, from the owner of the premises.”
• Section 59: Enables the Jal Sansthan to fix the cost of water supply.
• Section 63: Allows the Jal Sansthan to charge fees for various services.

These provisions establish the Jal Sansthan’s authority to levy taxes, fees, and charges for water and sewerage services, and define the scope and limitations of these powers.

Arguments

Appellants’ Arguments (Jalkal Vibhag Nagar Nigam):

• The UP Water Supply and Sewerage Act provides a comprehensive framework for the establishment, functions, and powers of the Jal Sansthan, including the levy of water and sewerage taxes under Section 52(1).
• The decision in Union of India v. State of U.P. is not applicable because it dealt with a service charge on railways, not a tax under Section 52(1)(a).
• The levy under Section 52(1)(a) is a tax on premises, which includes land and buildings, and falls within the ambit of Entry 49 of List II of the Seventh Schedule of the Constitution.

Respondents’ Arguments (Pradeshiya Industrial and Investment Corporation):

• The levy under Section 52(1)(a) is not a tax on ‘lands and buildings’ under Entry 49 of List II, but rather a fee for water supply.
• The charge under Section 52(1)(a) is essentially a fee, not a tax and hence cannot be subsumed under Entry 49 of List II.
• The wording of Section 52(1)(a), which imposes the levy on “premises situated within the area of the Jal Sansthan,” is merely to identify the territorial jurisdiction and does not make it a tax on land and buildings.
• The nature of the levy should be determined from the primary object and essential character of the legislation.
• Several provisions of the legislation indicate that the imposition is not a tax on lands and buildings:
  • Section 56 distinguishes between premises connected and not connected with water supply.
  • The statute differentiates between owners and occupiers, which is not typical of a tax on lands and buildings.
  • Section 25(2)(vi) empowers the Jal Sansthan to amend tariffs for water supply and sewerage services.
  • Section 44 allows the Jal Sansthan to adjust rates to meet operational costs.
  • Section 101(2) stipulates that the collected money shall be applied exclusively for water supply or sewerage services.
• The levy, though labeled as a water tax, is a fee and not a tax and therefore cannot be sustained under Entry 49 List II.
• Entry 17 of List II provides for “water and water supplies.”
• The levy under Section 52(1)(a), though described as a water tax, is effectively an exaction on water or water supply.

Rebuttal by the Appellants:

• The two-judge bench in Union of India v. State of U.P. erroneously interpreted Section 52 as a fee.
• The levy imposed on the railways was a service charge, not a tax.
• The observations in Union of India v. State of U.P. that the imposition under Section 52 is a fee are per incuriam.
• The levy under Section 52(1)(a) is on premises, which includes land and buildings, and falls under Entry 49 of List II.
• Entry 17 of List II deals with water and water supplies, while Entry 49 deals with taxes on land and buildings.
• The levy is a tax on lands and buildings, with the measure of the tax being the assessable value.
• The taxing event must be distinguished from the measure, rate, and incidence of the tax.

The innovativeness of the argument by the respondent lies in the interpretation of the term “premises” and its relationship with the water supply services, arguing that the levy is not a tax on land and buildings but a fee for water supply.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the demand of water tax and sewerage tax is sustainable with reference to the provisions of the UP Water Supply and Sewerage Act.
2. Whether the State Legislature has the legislative competence to levy the tax under the provisions of Section 52(1)(a).

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

The Court relied on these authorities to establish the principles of taxation, the nature of taxes on lands and buildings, and the distinction between taxes and fees. The Court specifically overruled the observations in Union of India v. State of U.P. regarding the nature of the levy under Section 52.

Judgment

How each submission made by the Parties was treated by the Court?

How each of the Authorities cited were viewed by the Court?

• Govind Saran Ganga Saran v. CST: The Court used this case to outline the essential components of a tax, which helped in analyzing whether the levy under Section 52(1)(a) was indeed a tax.
• Commissioner of Income Tax (Central) – I, New Delhi v. Vatika Township Private Limited: The Court reiterated that the rate at which a tax is imposed is an essential component of a tax regime.
• Federation of Hotel and Restaurant Association of India v. Union of India: The Court relied on this case to emphasize that the subject of a tax is different from the measure of the levy, and the measure does not determine the essential character of the tax.
• State of West Bengal v. Kesoram Industries Ltd: The Court used this case to highlight that the measure employed for assessing a tax must not be confused with the nature of the tax.
• Ralla Ram v. Province of East Punjab: The Court referred to this case to clarify that annual value is a standard by which income is measured and that a tax on land is not necessarily a tax on income.
• V Pattabhiraman v. The Assistant Commissioner of Urban Land Tax, North Madras (North West) Ayanavaram: The Court cited this case to support the view that a tax on the market value of land is within the purview of Entry 49 of List II.
• Ajoy Kumar Mukherjee v. Local Board of Barpeta: The Court cited this case to support that the use to which the land is put can be considered while imposing a tax on it within the meaning of Entry 49 of List II.
• Assistant Commissioner of Urban Land Tax v. Buckingham and Carnatic Co. Ltd. Etc.: The Court cited this case to support the fact that a State legislature may adopt the annual or capital value of lands and buildings for determining the incidence of tax under Entry 49 of List II.
• Union of India v. HS Dhillon: The Court used this case to summarize the requisites of a tax under Entry 49 of List II.
• Goodricke Group Limited v. State of WB: The Court cited this case to clarify that a tax on land can be imposed with reference to its income or yield without ceasing to be a tax on land.
• Raza Buland Sugar Co. Ltd. v. Municipal Board, Rampur: The Court referred to this case to support the view that a water tax imposed on the annual value of lands and buildings is within the competence of the State legislature.
• Nizam Sugar Factory Ltd. v. City Municipality, Bodhan: The Court referred to this case to support the view that a water tax imposed on the annual value of lands and buildings is within the competence of the State legislature.
• M.P.V. Sundararamier & Co. v. State of AP: The Court cited this case to highlight that the Constitution differentiates between the subject matter of legislation and the tax in relation to that subject matter.
• Corporation of Calcutta v. Liberty Cinema: The Court referred to this case to highlight the scheme of entries in the lists.
• Jindal Stainless Ltd. v. State of Haryana: The Court referred to this case to highlight the scheme of entries in the lists.
• Southern Pharmaceuticals and Chemicals, Trichur v. State of Kerala: The Court used this case to discuss the distinction between a tax and a fee, noting that the traditional concept of quid pro quo is undergoing a transformation.
• Municipal Corporation of Delhi v. Mohd. Yasin: The Court cited this case to further explain that there is no generic difference between a tax and a fee.
• Sreenivasa General Traders and Others v. State of Andhra Pradesh: The Court used this case to reiterate that there is no generic difference between a tax and a fee and that the element of quid pro quo is not always a sine qua non for a fee.
• Sirsilk Ltd. v. Textile Committee: The Court cited this case in the context of the discussion of the distinction between a tax and a fee.
• Union of India v. State of U.P.: The Court overruled the observations in this case that the imposition under Section 52 is in the nature of a fee, holding that it is a tax on lands and buildings.

The Court thoroughly analyzed each case, applying the principles to the facts of the present case and clarifying the legal position on taxes on lands and buildings.

Final Decision

The Supreme Court allowed the appeal and set aside the judgment of the High Court. The Court held that the levy of water tax under Section 52(1)(a) of the Uttar Pradesh Water Supply and Sewerage Act, 1975, is a tax on lands and buildings, falling within the legislative competence of the State Legislature under Entry 49 of List II of the Seventh Schedule of the Constitution. The Court overruled the observations in Union of India v. State of U.P., which held that the levy under Section 52 was a fee, not a tax.

The Court reasoned that:

• The levy is on premises, which includes land and buildings.
• The measure of the tax is the annual value of the premises.
• The restrictions under Section 55 do not alter the nature of the levy as a tax on lands and buildings.
• The nomenclature given to the tax does not change its true character.
• The essential character of the levy is that it is a tax on land and buildings, and not a fee for water supply services.

The Court concluded that the Jal Sansthan was competent to levy the water tax as a tax on land and buildings.

Flowchart of the Decision-Making Process

Key Takeaways

The Supreme Court’s judgment in Jalkal Vibhag Nagar Nigam vs. Pradeshiya Industrial and Investment Corporation clarifies several key points:

• Nature of Water Tax: The water tax levied under Section 52(1)(a) of the UP Water Supply and Sewerage Act is a tax on lands and buildings, not a fee for water supply services.
• Legislative Competence: The State Legislature has the legislative competence to levy this tax under Entry 49 of List II of the Seventh Schedule of the Constitution.
• Overruling of Previous Decision: The observations in Union of India v. State of U.P., which characterized the levy as a fee, were overruled.
• Tax vs. Fee: The Court emphasized that the essential character of the levy is that of a tax on land and buildings, not a fee for services.
• Measure vs. Nature of Tax: The measure of the tax (annual value) does not determine the nature of the tax.
• Tax on Premises: The term “premises” includes both land and buildings, and the tax is levied on these within the Jal Sansthan’s area.

This judgment provides a definitive interpretation of the UP Water Supply and Sewerage Act and clarifies the legislative powers of the State in relation to taxes on lands and buildings.